Group Exercise 2 Global Economics
Global Economics Group Exercise 2
Team 1
Alejandra Ojeda, Steven Veydt, Donghwan Kim, Yijun Liu, Nikita Buhktoyarov
November 24th 2014
1. Explain how each of the following events affects the monetary base, the M1 money multiplier (checking accounts), and the money supply (Currency in circulation) a) The Central Bank buys bonds in the open market
If the Central Bank buys bonds, the monetary base increases because of the amount of the currency in circulation and the bank reserves purchase. Both the assets of the central bank and the liabilities will be benefitted. b) The Central Bank raises the required reserves ratio.
The change in the reserves ratio will affect the bank credits, will reduce the volume of the deposits that are supported by the reserves and this will reduce the monetary base by raising the cost of the credits and loan interests making it less accessible to the public. c) The Central Bank decreases the discount rate and banks respond by borrowing from the Central Bank.
According to the easy monetary policy, when the central bank reduces its discount rate, the interest rate in the currency in circulation and bonds markets will go down. Therefore People will be more interested in getting a loan from the bank as it is going to be easier to make profits.
d) The Central Bank buys foreign currency from a domestic foreign exchange dealer.
The country makes many trades in the international market, therefore instead of fixing their exchange rate they decide to buy or sell foreign currency, by doing this the money supply will increase because of the exchange reserves and this could create inflation.
e) There are rumors about a computer virus attack on ATMs and people retrieve cash from the ATMs.
The virus can have access to the information of account holders as pin numbers and amount of money. This action wont affect the monetary base nor the money multiplier but the money supply may increase as peoples financial identity may be stolen and used
Team 1
Alejandra Ojeda, Steven Veydt, Donghwan Kim, Yijun Liu, Nikita Buhktoyarov
November 24th 2014
1. Explain how each of the following events affects the monetary base, the M1 money multiplier (checking accounts), and the money supply (Currency in circulation) a) The Central Bank buys bonds in the open market
If the Central Bank buys bonds, the monetary base increases because of the amount of the currency in circulation and the bank reserves purchase. Both the assets of the central bank and the liabilities will be benefitted. b) The Central Bank raises the required reserves ratio.
The change in the reserves ratio will affect the bank credits, will reduce the volume of the deposits that are supported by the reserves and this will reduce the monetary base by raising the cost of the credits and loan interests making it less accessible to the public. c) The Central Bank decreases the discount rate and banks respond by borrowing from the Central Bank.
According to the easy monetary policy, when the central bank reduces its discount rate, the interest rate in the currency in circulation and bonds markets will go down. Therefore People will be more interested in getting a loan from the bank as it is going to be easier to make profits.
d) The Central Bank buys foreign currency from a domestic foreign exchange dealer.
The country makes many trades in the international market, therefore instead of fixing their exchange rate they decide to buy or sell foreign currency, by doing this the money supply will increase because of the exchange reserves and this could create inflation.
e) There are rumors about a computer virus attack on ATMs and people retrieve cash from the ATMs.
The virus can have access to the information of account holders as pin numbers and amount of money. This action wont affect the monetary base nor the money multiplier but the money supply may increase as peoples financial identity may be stolen and used